The time bomb in the tax code that's fueling mass tech layoffs

Scope of the problem: does Section 174 “explain” mass layoffs?

• Many argue Section 174 cannot fully explain mass tech layoffs:
  • Most laid‑off staff weren’t doing what people normally call “R&D” (e.g. games, line‑of‑business apps, ops).
  • Other major drivers cited: end of zero‑interest‑rate era (ZIRP), pandemic over‑hiring, slower growth, Twitter’s high‑profile cuts, and classic wage‑suppression tactics.
• Others counter that, for tax purposes, a huge share of tech headcount is classified as R&D, especially since the code now explicitly treats software development as R&D. So the rule change does affect a large fraction of engineers, PMs, data scientists, etc.

What actually changed in Section 174?

• Pre‑2022: qualified R&D (including software dev if elected) could be 100% expensed in the year incurred.
• Post‑change: “specified research or experimental expenditures” must be amortized:
  • 5 years for US R&D, 15 years for foreign R&D.
  • Software development is explicitly deemed R&D; most dev labor now becomes capitalized, not immediately deductible.
• Transition effect: companies went from deducting 100% to deducting only ~10–20% in year one, with the rest spread over later years.

Cash‑flow mechanics and who gets hurt

• Several concrete examples show how a company can have zero (or negative) cash profit but be taxed as if it were strongly profitable, because only a fraction of dev salaries is deductible in the current year.
• In steady state with flat headcount, total deductions over time are similar; the real costs are:
  • Time value of money (you’re effectively lending the IRS cash at 0%).
  • A multi‑year “tax spike” during the transition and during rapid growth.
• Consensus in the thread:
  • Big, stable, cash‑rich firms (FAANG‑type) are affected but can absorb it; many were already capitalizing dev work.
  • Small, thin‑margin or modestly profitable software firms, and fast‑growing startups, are hit hardest; some report tax bills quadrupling, hiring freezes, or shutdowns.

Is this good policy? Competing views

• One side: this simply closes a generous R&D loophole; software is a capital asset like a factory, so its creation costs should be amortized; subsidies distort markets and shift burden to taxpayers and non‑R&D firms.
• Other side: historically, immediate expensing was a deliberate pro‑innovation policy; removing it:
  • Discourages R&D and early revenue, especially in software where code ages quickly and many firms never reach year 5.
  • Entrenches incumbents and weakens the startup ecosystem and open‑source work.

Politics and “time bomb” framing

• Change came from the 2017 tax act, effective 2022, widely viewed as a budget‑scoring gimmick to offset corporate rate cuts.
• There is broad bipartisan interest in restoring immediate expensing, but fixes have repeatedly stalled and are now bundled as a temporary rollback inside a larger, controversial tax bill.
• Some see Section 174 as a deliberate political time bomb and a bargaining chip; others attribute the mess to routine reconciliation games and legislative dysfunction rather than targeted malice.